Monday, November 30, 2009

Government bureaucrats in Washington threaten financial sanctions against mortgage companies unless they get people to sign up for a publicly touted Administration foreclosure relief program. A very public White House effort, coincidently,everyone admits is a total failure until now.

Of course there are no political motives here. It would be cynical to suggest otherwise. Just because there is smoke we really shouldn't assume there is fire, right?

I'm waiting to hear the outcry on this issue. The protests, the loud and vocal reminders that in a capitalist society government doesn't tell private companies what to do. Or that corporations do not go to the government with heads bowed like disheartened orphans in Oliver Twist and beg for bowls of public gruel to keep their zombie firms alive.

As I said, I'm waiting to hear the outcry and yes, here I am being cynical. There won't be any protests, of this I am certain. Such government orders, economic dictates, public mandates, workplace rules, environmental policies, OSHA directives, and so on are so common that this one pesky memo to a collection of mortgage companies has already been lost in a hurricane of paper that stretches from sea to shining sea.

Robert J. Abalos, Esq.

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Gov't increases pressure on mortgage industry

WASHINGTON (AP) -- The Obama administration will crack down on mortgage companies that are failing to do enough to help borrowers at risk of foreclosure, as part of a broad effort to boost participation in its mortgage assistance program.

The Treasury Department said Monday it will withhold payments from mortgage companies that aren't doing enough to make the changes permanent. Officials will monitor the largest of the 71 participating mortgage companies via daily progress reports.

The goal is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments. At the end of October, more than 650,000 borrowers, or 20 percent of those eligible, had signed up for trials lasting up to five months.

But getting homeowners to complete the process has been tough.

As of early September, only about 1,700 homeowners had finished all the paperwork and received a new permanent loan. Treasury officials projected Monday that 375,000 homeowners would hit the deadline to convert to permanent modifications -- or fall out of the program -- by year-end.

In an effort to shame the companies into doing a better job, Treasury will publish a list in December of the mortgage companies, also known as servicers, that are lagging.

"We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones," Phyllis Caldwell, who recently was named to lead the Treasury Department's homeownership preservation office, said in a statement.

Under the administration's $75 billion program, companies that agree to lower payments for troubled borrowers receive several thousand dollars in incentive payments for modified loans, but those payments aren't made until the modifications is permanent.

Some executives, however, said they have had trouble getting borrowers to return necessary documents to complete the modifications, which allow homeowners to have their mortgage interest rate reduced to as low as 2 percent for five years.

"The documents were confusing. Borrowers did not understand the process wasn't closed until the documents came in," Sanjiv Das, chief executive of Citigroup's mortgage unit, said earlier this month. "Even when the documents came in, they were not always complete."

Mortgage finance company Freddie Mac has hired an outside company Titanium Solutions Inc. to send real estate agents around the country to knock on borrowers' doors and help them complete the paperwork.

"It can be a little bit intimidating," said Patrick Carey, Titanium's chief executive. "They don't, in many cases, understand exactly what is being asked of them."

The program has come under heavy criticism for failing to do enough to attack a tidal wave of foreclosures. Analysts say the foreclosure crisis is likely to persist well into next year as rising unemployment pushes more people out of their homes.

About 14 percent of homeowners with mortgages were either behind on payments or in foreclosure at the end of September, a record level for the ninth straight quarter, according to the Mortgage Bankers Association.

The Congressional Oversight Panel, a committee that monitors spending under Treasury's bailout program, concluded last month that foreclosures are now threatening families who took out conventional, fixed-rate mortgages and put down payments of 10 to 20 percent on homes that would have been within their means in a normal market.

Treasury's program, known as the Home Affordable Modification Program, "is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the report said.

Saturday, November 28, 2009

The title of this blogpost and this article from Bloomberg below speak for themselves, and the words are not happy.

Robert J. Abalos, Esq.

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Dollar Drops to 14-Year Low Against Yen on Fed Rate Outlook

Nov. 28 (Bloomberg) -- The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.

The dollar touched as low as 84.83 yesterday, the weakest in 14 years, spurring speculation Japan would intervene to curtail gains in its currency. For the week, the greenback fell 2.6 percent to 86.57 yen, the fifth consecutive weekly decline. The dollar and yen rallied against the Australian dollar and the South Korean won as Dubai’s attempt to delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.

“The market has re-priced the risk it is willing to sit with, noticeably against the dollar-yen,” said Lane Newman, director of currency trading at ING Financial Services Corp. in New York. “My sense is that damage has been done, the market being not as liquid as it has been in a long time. It is going to trade in this way and when the market has to do something it’s going to be very, very ugly.”

The dollar declined 0.7 percent to $1.4962 per euro from $1.4862 on Nov. 20. The yen rose 2 percent to 129.41 per euro, from 132.09. The U.S. currency fell 2.8 percent to 86.49 yen, from 88.88 yen.

Rate Check

Stocks and commodities dropped, Treasuries jumped and credit default swaps climbed after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. The Persian Gulf emirate, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II.

The yen declined yesterday against the dollar as Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.

Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.

“If the dollar-yen falls below an 85 level the odds of intervention would rise materially,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Clearly this is somewhat of an unfolding of events given previous signals of a strong yen policy but a strong yen will become a problem for the Japanese economy.”

Extended Period

The greenback fell earlier in the week on speculation the Fed will trail other central banks in increasing borrowing costs after policy makers said in the minutes of their November meeting that they will keep interest rates near zero for “an extended period” as long as inflation expectations are stable and unemployment fails to decline.

The minutes, released on Nov. 24, also said the dollar’s depreciation was “orderly,” indicating policy makers are willing to tolerate a weaker U.S. currency.

The economy probably lost 120,000 jobs in November, according to the median estimate of economists surveyed by Bloomberg before the Labor Department report on Dec. 4. The jobless rate probably held at a 26-year high of 10.2 percent for a second month, according to a separate survey.

Remain Dovish

The dollar has depreciated 7 percent against the euro, 4.5 percent against the yen and 13 percent versus the pound in 2009.

“The market has been readjusting to expectations that the Fed will remain dovish on monetary policy well into the first quarter of next year,” said Neil Jones, head of European hedge- fund sales in London at Mizuho Corporate Bank Ltd. “Additionally, there is a global shift of the dollar increasingly being viewed as the funding currency of choice for the carry trades.”

Investors use lower-yielding currencies for funding so- called carry trades, in which higher-yielding assets are purchased with funds borrowed in nations with low interest rates. The benchmark lending rate of zero to 0.25 percent in the U.S. makes its currency popular for funding such transactions.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners including the euro, yen and pound, dropped 0.9 percent on the week to 75. It has fallen 7.3 percent in 2009.

Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, plans next month to raise minimum credit score requirements and limit the amount of overall debt borrowers can carry relative to their incomes.

The changes are the latest in a series of crackdowns by the mortgage industry and could some surprise some prospective home buyers. The industry is rolling back loose lending standards that led to the mortgage meltdown and the subsequent economic crisis. But the fear is that if the industry becomes too restrictive, it will freeze out too many borrowers and impede an economic recovery.

Already, lending by U.S. banks plunged by 2.8 percent in the third quarter, the largest drop since at least 1984, according to federal data released this week. Some of that retrenchment is fostered by District-based Fannie Mae and McLean-based Freddie Mac, which refuse to buy loans that do not meet their rules, meaning lenders have to abide by their guidelines or else lose a key source of financing.

Starting Dec. 12, the automated system that Fannie Mae uses to approve loans will reject borrowers who have at least a 20 percent down payment but whose credit scores fall below 620 out of 850. Previously, the cut-off was 580.

Also, for borrowers with a 20 percent down payment, no more than 45 percent of a their gross monthly income can go toward paying debts. Fannie declined to disclose the previous threshold, except to say that it was higher. The company will raise the level to 50 percent in cases with "strong compensating factors."

Brian Faith, a Fannie Mae spokesman, said these limits reflect the company's recent experience. Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Faith said. Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.

"It's not enough to help borrowers buy a home -- we must also ensure that they can stay in the home over the long term," Faith said in a statement.

Several lenders have imposed tougher restrictions on their own. Others have changed their rules in anticipation of the new guidelines. And several said the new rules are not necessarily a bad idea.

"But you will have people get caught up in the net," said Bob Walters, chief economist at Quicken Loans, an online lender. "When you look at all the people layering in different guidelines, they're all putting down a patchwork of rules and the net effect is that the universe of people able to get loans is getting smaller."

Jennifer Du Plessis of George Mason Mortgage, a direct lender that sells loans to other banks as well as Fannie and Freddie, said that at least one bank she knows of started imposing the 45 percent debt limit within the past few weeks while others have set that limit at 50 percent.

"It is going to limit people's ability to qualify for a loan, absolutely," Du Plessis said. "We've seen it on a few of our loans, where they had to get more money down or buy a lesser house."

Emily McCombie, a recent college graduate with good credit and enough saved for a decent down payment, was pre-approved for a $200,000 loan when she moved to Loudoun County from Pennsylvania in August.

McCombie, a teacher, started shopping for a townhouse immediately. But when it came time to buy, she was surprised to learn that her salary and her debts, mostly school loans, did not meet new debt-to-income requirements imposed by her lender. She was only able to secure $185,000.

"It was a big drop for me," McCombie said. "I did find a condo, luckily, and I bought it. But I felt like I had wasted so much time looking at a price range I couldn't afford."

Tuesday, November 24, 2009

When old records get broken, people should take notice. A statistic that stood for seventy years and brings us back to the Great Depression ought to be big news. I'm curious if the mainstream media will mention this financial embarrassment tonight at 6PM.

This new threshold does not bode well for the future markets.

Everyone is against speculation, including me. I can agree with Chuck Schumer on this one. Isn't that what just caused the latest financial crisis, the mortgage meldown, and the loss of tens of trillions of dollars of investor equity? Can anyone ever forget the speculation horrors of NASDAQ in 2000 and Miami in 2008?

So then why is the Fed encouraging speculation?

When you can borrow at zero, then take this money and buy stocks with it at 50% margin or less, you can't lose money, right? Right????

I often read that Mr. Bernanke is a scholar and one of the world's greatest experts on the Great Depression and its causes. Certainly if he can remember the past we won't be doomed to repeat that grievous past, or so the logic goes.

When I hear this pablum I am reminded of all the great minds of science and finance who thought the great ship Titanic unsinkable.

Robert J. Abalos, Esq.

Bills Yielding Zero as Stocks Soar Make 1938 Moment

Nov. 23 (Bloomberg) -- For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence in U.S. financial markets that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. As 1939 began, stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.

While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings.

“The question is what are you going to do with all the money that has been created?” said James Hamilton, a former visiting scholar at the Fed who teaches at the University of California, San Diego. “It’s not a contradiction at all to see very low short-term yields and at the same time have people trying to buy stocks. They are both reflecting that same force.”

Dipping Below Zero

Three-month bills traded at a rate of 0.005 percent today, down from 0.11 percent at the end of September and the year’s high of 0.34 percent in February. Traders said the rate dipped below zero on some bills due in January on Nov. 19.

As money poured into bills, the S&P 500 ended little changed on the week at 1,091.38, up 64 percent from the low this year of 666.79 on March 6. The S&P GSCI Index of 24 commodities rose 46 percent this year, rebounding from last year’s 43 percent slump. Investors in high-yield, high-risk, or junk, corporate bonds earned a record 52 percent this year, according to Merrill Lynch & Co. indexes. The rose to 1,107.31 at 9:40 a.m. in New York.

“A lot of these markets have been driven by excess liquidity and are not necessarily supported by economic fundamentals,” said Thomas Girard, a managing director at New York Life Investment Management who helps oversee $115 billion in fixed-income assets. “Clearly there is a class of investors that are nervous,” said Girard, who is avoiding bills and instead buying high-rated corporate bonds.

‘Not Obvious’

Bernanke, who has been studying the causes of the Depression since he was a graduate student at Massachusetts Institute of Technology, said on Nov. 16 that it’s “not obvious” that asset prices in the U.S. are out of line with underlying values. He didn’t address asset prices outside of the country. In 1989, he wrote an article with Mark Gertler, a New York University economics professor, for the American Economic Review in which they presented a detailed model that helps to explain the cascade of events that led to the collapse of markets in the years after the 1929 crash.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” Bernanke said in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

Equity investors say they have history on their side. The S&P 500 rose an average 8.4 percent in the six months before the last five increases in the Fed’s target rate for overnight loans between banks and added another 82 percent in the bull markets that followed, according to data compiled by Bloomberg. Shares typically rise before central banks push up interest rates because markets anticipate economic expansion first.

‘Enough of It’

The median estimate of economists surveyed by Bloomberg News is for policy makers to keep their target rate for overnight loans between banks in a range of zero to 0.25 percent until the third quarter of 2010.

“There’s clearly room for the stock market to do better,” said Mark Bronzo, a money manager in Irvington, New York, at Security Global Investors, which oversees $21 billion. “If money is all going into short-term securities, at some point, investors will say ‘enough of it’ and the next incremental change will be for money to chase riskier assets.”

The bulls got a boost last week when the Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year as China powers a global recovery. The economy of the group’s 30 countries will expand 1.9 percent in 2010, the Paris-based organization said in a Nov. 19 report, up from a prediction of 0.7 percent in June.

‘Recovery in Motion’

“We now have numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, said.

Demand for bills has also been driven by banks adding the safest securities to improve balance sheets at year-end, a drop in sales as the Treasury lessens its dependence on short-term financing and fewer alternatives as companies cut back on sales of commercial paper.

“I don’t see negative yields in this current environment as anything anomalous,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge and former economist at the Office of the Comptroller of the Currency.

Recovery Doubts

Even so, bond investors doubt the strength of the recovery after the Federal Housing Administration said last week that foreclosures on prime mortgages and home loans insured by the agency rose to three-decade highs in the third quarter. Builders broke ground on 529,000 houses at an annual pace in October, down 11 percent from September and the fewest since April’s record low, Commerce Department figures showed Nov. 18.

“Everything is not dandy in this world,” said Axel Merk, who manages more than $550 million as president of Palo Alto, California-based Merk Investments LLC and has been buying bills. “Sure money is flowing into risky assets and people are leveraging up, but it is only available to those with pristine credit. It is still a very difficult environment for people to function in and many would still rather hold Treasuries.”

In Treasury auctions during the week ended Nov. 6, the combined bids for the $86 billion in one-, three- and six-month bills sold was a record $361 billion, $100 billion more than the peak set during the height of the credit crisis last year, according to Jim Bianco, president of Bianco Research in Chicago.

The bid-to-cover ratio for the three-month bill auction reached 4.29 in September, the highest since 1998. The ratio has averaged 3.9 since September, up from 2.74 in 2008. When the U.S. sold $32 billion of four-week bills Nov. 16, the figure was 3.79.

‘Tremendous Demand’

“We cannot spin a positive story from the fact that a third-of-a-trillion dollars a week is trying to lock down Treasury bill yields of less that 0.05 percent,” Bianco said. “There is still tremendous demand for the front end of the curve despite the fact that people are saying things like there is no yield there and that cash is trash.”

Yields on government bonds are falling, too, with the average dropping to 2.20 percent last week from 2.50 percent in August, according to the Merrill Lynch Global Sovereign Broad Market Plus Index.

Finance officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s monetary policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery. The central bank’s target rate has been between 0 and 0.25 percent since December.

‘Process of Reflation’

Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said that the “systemic risk” of new asset bubbles is rising with the Fed keeping rates at record lows.

“The Fed is trying to reflate the U.S. economy,” Gross said in his December investment outlook on Nov. 19. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

Economic growth will be unlike most post-recession periods with banks reluctant to lend, the personal savings rate lower, the labor market less cyclical, excess housing supply greater and state and local budget gaps larger, according to Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. His forecast of 2.1 percent growth in 2010 is below the 2.6 percent median of 63 economists surveyed by Bloomberg News.

Yield Curve

The flight into bills may mean that yields on shorter- maturity debt hold at about record lows into 2010 as longer-term yields rise. The so-called yield curve that measures the gap in rates between 2- and 10-year Treasury notes expanded to 2.66 percentage points this month, the widest since July.

That benefits Citigroup Inc., JPMorgan Chase & Co. and banks which have taken $1.7 trillion in writedowns and losses since the start of 2007 and which make money on the difference between the rates they pay on short-term deposits and the interest income generated on loans.

“A lot of people have been hiding out in the front end of the curve, waiting to see how this economy turns out,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Fed and are required to bid at Treasury auctions. “As a short-term parking mechanism, Treasury bills provide great liquidity and safety.”

Allure of Bills

The allure of bills increased last quarter after the government dropped its guarantee of money market mutual funds, said Merk, who is now only putting his fund’s dollar-denominated cash in bills. The Treasury’s guaranteed money market mutual fund deposits a year ago to stem an investor run the week after Lehman Brothers Holdings Inc.’s bankruptcy led to the collapse of the $62.5 billion Reserve Primary Fund, triggering a run on assets. The guarantee expired Sept. 18.

The supply of bills will decline about 10 percent from September through February as the Treasury cuts its Supplementary Financing Program for the Fed to $15 billion from $200 billion, said Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey. When the Treasury sells bills at the Fed’s behest, it drains reserves from the banking system and makes the central bank’s job of controlling rates easier.

“Bill yields can stay down here for a considerable period,” said Robert Auwaerter, head of fixed income at Valley Forge, Pennsylvania-based Vanguard Group Inc., which manages $1 trillion in assets. “There’s still a demand for high-quality assets at the front end of the curve, and a lack of alternatives.”

Commercial Paper Contraction

Unsecured commercial paper outstanding was $1.24 trillion in the week ended Nov. 11. While that is up from a seasonally adjusted $1.07 trillion in July, it’s below the $2.22 trillion reached in July 2007, before the collapse of the subprime mortgage market.

Demand for bills typically rises at year-end as banks buy more to bolster their balance sheets at that time, said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Securities, a New-York based brokerage for institutional investors.

Fed officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices, people with knowledge of the matter said last week. Supervisors are examining whether banks such as JPMorgan, Morgan Stanley and Goldman have enough capital for the risks they take, how much they know about the strength of their counterparties.

“At some point reality is going to bite us in the backside,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “We are living in the best of times and the worst of times. Unfortunately the best of times cannot continue celebrating like this when the economic fundamentals are worsening rapidly.”

Saturday, November 21, 2009

Buying a home is not as simple as most people think, or as easy as it seems to be, especially if you want to do it right.

This article below from YAHOO Real Estate and Investopedia offers excellent advice on how to avoid the eight most common mistakes homeowners make when buying a home.

Of course, there are about 250 other common mistakes potential homebuyers routinely make ranging from choosing the wrong neighborhood, selecting the wrong mortgage, not avoiding PMI, and so on but those issues are for another day---and another few dozen articles.

Top 8 House-Hunting Mistakes

By Amy Fontinelle, Investopedia

Oct 30th, 2009

These mistakes will blow your cool -- your budget is likely to follow.

Buying a home is a very emotional process, and allowing those emotions to get the best of you can cause you to make any number of mistakes. Since buying a home has many far-reaching implications, from where you will live to how hard it will be to make ends meet, it's important to keep your emotions in check and make the most rational decision possible.

There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home.

Once you've fallen in love with a particular home, it's hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered - the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can't or won't be able to afford that house, you're just hurting yourself. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you're settling for less than you deserve, it's best to only look at homes in your price range.

Mistake 1: Falling in love with a house you can't afford

Further, start your search at the low end of your price range - if what you find there satisfies you, there's no need to go higher. Remember, when you buy another $10,000 worth of house, you're not just paying an extra $10,000 - you're paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of yourloan. You may be better off putting that money toward another purpose.

Mistake 2: Thinking that a particular house is the only one that will suit you

Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Mostneighborhoods have multiple homes that are the same model. Further, most neighborhoods are full of homes that were all constructed by the same builder, so even if you can't find an identical model for sale, you can probably find a house with many of the same features. If you're considering a condo or townhouse, the odds are also in your favor.

Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. Another house in the same area might be similar enough to meet your needs but be less expensive. Likewise, you could find a similar model with more of the upgrades you're looking for at a similar price.

Mistake 3: Being so desperate to become a homeowner that you buy a place that doesn't suit you

When you've been looking for a while and you're not seeing anything you like - or worse, you're getting outbid on the houses you do want - it's easy to start thinking that what you really want simply won't happen. If you move into a house you'll end up hating, the transaction costs to get rid of it will be costly. You'll have to pay an agent's commission (up to 5-6% of the sale price) and you'll have to pay closing costs for the mortgage on your new house. You'll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. The best advice is to wait if you have the luxury of time, or to correct your vision for your future to what you actually need, not want.

Mistake 4: Overlooking important flaws in the structure, appearance or location of the house

For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.

Mistake 5: Thinking you're a handyman when you're not

Don't buy a fixer-upper that's more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can't once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labor - and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn't move-in ready.

Mistake 6: Putting in an offer before carefully considering all the pros and cons of the property

In a hot market (or even a hot submarket, with dirt-cheap, bank-owned properties during a housing slump) it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don't neglect important steps like making sure the neighborhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally you'll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you're about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.

Mistake 7: Being too slow to pull the trigger

It's a tough balancing act to make sure you make a careful decision yet don't take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let's say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the homebuying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don't pull the trigger quickly, someone else might, and you'll have to keep looking. Don't underestimate how time-consuming and routine-disrupting house shopping can be.

Mistake 8: Offering more than a house is worth

If there's a lot of competition in your market and you find a place you really like, it's all too easy to get sucked into a bidding war - or to try to preempt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn't appraise at or above the amount of your offer, the bank won't give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent'sopinion before making an offer.

Conclusion

Even knowing all of these things, it's still hard to act on them. You may still find yourself making decisions based on emotion during the home-buying process. Slow down, overcome your emotions and, ultimately, make a home-purchase decision that's good for both your feelings and your finances.

What does all of this say to you about future home prices, new home sales, and the ability for rental property owners to find tenants?

I'll give you one hint. The number of U.S. households is falling as people without jobs or insecure about their current ones move in with parents, family, or join together as roommates to share expenses.

One in every 136 U.S. households is now in foreclosure---and the number is still rising.

I don't know how you see all this but this sure doesn't look like a economic recovery to me. Forget about seeing the light at the end of the tunnel. I can't even find the tunnel yet.

I also applaud U.S. Representative Kevin Brady of Texas yesterday for calling upon Timothy Geithner to resign and having the guts to tell him so to his face during Congressional hearings. Geithner should be fired, and I bet he is forced out by Mr. Obama himself before the 2010 midterm elections.

U.S. Mortgage Delinquencies Reach a Record High

The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday.

Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman.

The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.

The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.

Some of the delinquent homeowners are scrambling and will eventually catch up on their payments. But many others will slide into foreclosure. The percentage of loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last year.

In the first stage of the housing collapse, defaults and foreclosures were driven by subprime loans. These loans had low introductory rates that quickly moved to a level that was beyond the borrower’s ability to pay, even if the homeowner was still employed.

As the subprime tide recedes, high-quality prime loans with fixed rates make up the largest share of new foreclosures. A third of the new foreclosures begun in the third quarter were this type of loan, traditionally considered the safest. But without jobs, borrowers usually cannot pay their mortgages.

“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said in a conference call with reporters.

In previous recessions, homeowners who lost their jobs could sell the house and move somewhere with better prospects, or at least a cheaper cost of living. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.

“There will be a lot more distressed supply entering the market, and it will move up the food chain to middle- and higher-price homes,” said Joshua Shapiro, chief United States economist for MFR Inc.

Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession. The mortgage bankers expect foreclosures to peak in 2011, well after unemployment is expected to have begun falling.

There was one sliver of good news in the survey: the percentage of loans in the very first stage of default — no more than 30 days past due — was down slightly from the second quarter. If that number continues to decline, at least the ranks of the defaulted will have peaked.

“It’s arguably a positive, but it doesn’t undermine the fact that there are still five or six million foreclosures in process,” Ms. Zelman said.

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The mortgage group’s survey noted, however, that the F.H.A. was issuing so many loans — about a million in the last year — that it had the effect of masking the percentage of problem loans at the agency. Most loans enter default when they are older than a year.

When the association removed the new loans from its calculations, the percentage of F.H.A. mortgages entering foreclosure was 30 percent higher.

The association’s survey is based on a sample of more than 44 million mortgage loans serviced by mortgage companies, commercial and savings banks, credit unions and others. About 52 million homes have mortgages. There are 124 million year-round housing units in the country, according to the Census Bureau.

Thursday, November 19, 2009

Below is an excellent analysis of the current U.S. residential housing market courtesy of YAHOO Finance. I agree with much of the statistical analysis and the comments made by everyone except the NAR representative. Again, much of what is said here should come as no surprise to readers of what I write but it is important to stress that often the mainstream media actually does get it right.

As to the comments made by the NAR spokesman, let me say this.

The National Association of Realtors is an excellent organization and it does fine work. But it is a trade association with a split purpose and both goals of the NAR are mutually exclusive when market conditions are bad.

The NAR has a duty to provide accurate real estate sales and home inventory information and projections to its members and the public. This job it does flawlessly. Its data and numbers are essential reading for real estate investors.

But the NAR also represents the financial interests of realtors, brokers, and sales agents who have an incentive to get people to buy properties. Its agents make money on commissions, remember?

The NAR cheerleads markets in bad times, making them seem better than they are. Not merely puffery and spin, mind you. That's okay and normal. I'm talking about rank manipulation of data and projections too.

And he was NAR's chief economist! That's him in the picture, by the way. I couldn't resist this cartoon, despite the fact that I have met David a couple of times over the years and he really is a nice guy.

Again, the National Association of Realtors does great work. I can't bash the organization or the people who work there. But they are caught between two masters, the truth and the pocketbook needs of their members, so I always take what the NAR says with about sixteen tons of salt.

Housing Slump May Worsen Next Year, Not Get Better

On 3:48 pm EST, Wednesday November 18, 2009

If you already took advantage of the government's tax credit for first-time homebuyers-or are planning to do it anytime soon-you'll probably agree with this prediction: Sales of existing homes will peak in the final quarter of 2009, then begin a year-long slide, which is likely to be a sharp one, according to some estimates.

"Most of it [the tax credit] is simply shifting sales from one period to another," says Global Insight economist Patrick Newport. "It doesn't get rid of the fundamental problem; there's still a glut of houses."

Newport, for instance, expects single-family home sales to hit an annual rate of 5.88 million units in the fourth quarter (vs. 5.30 in the third quarter). Thereafter, sales will fall to 5.65 million in the first quarter and average just 4.75 million in the second half of the year.

"We expect a little stall in 2010," says David Crowe, chief economist at the National Association of Home Builders. "I agree, you do advance demand, so you steal it for the future."

The builders' group has a similar forecast, with sales peaking at 5.60 million units in the first quarter and bottoming at 4.50 million in the third quarter, for a 2010 average of 5.15 million. That's marginally above the 2008 rate of 4.91 million.

The accuracy of those forecast depends-like many things about the economy these days-on the job market, whose recovery is looking a bit delayed, based on historical patterns.

Some proponents of the tax credit, as well its recent expansion to repeat buyers and extension from the end of November through that of April, assumed it would prompt some people to purchase sooner than they originally intended, but those purchases would later be replaced by another group of buyers who were no longer concerned about job security.

"The economy and the job market didn't pick up as people expected in '09 and as a consequence that is rolling it in 2010," says Crowe.

There's even some doubt that the $6500 credit for repeat buyers will make much of a difference. The original credit did not have the expected trickle-down effect on new homes.

"I don't know if the expansion is really going to get anyone else into the market, if you think about what the transaction costs," says Andrew Jakobovics, associate director for housing and economics at the Center for American Progress. "The people who are going to take advantage of it were going to move anyway."

And by most analysis, that's unlikely to be enough.

Most economists see the jobless rate-now 10.3 percent-peaking around 11 percent sometime in early to mid 2010 and then creeping down to around 10 percent by the end of the year.

That's too high to make much of a dent in the current glut. Inventory levels are now at an 8-9-month supply--Down from the 10-11-month levels of early 2009, but still above the 6-7-month goal.

"At the end of 2010, you're still going to have that glut," says Newport.

Another casualty of the job market is household creation, which has meant a steady stream of buyers in the past, helping keep inventories at a healthy level.

In 2008, for the first time in years, household creation fell-and sharply, too. At the same time, the number of young adults living at home and average marriage ages increased. More recently, there has been a flattening.

"A lot of the new households will be renters or stay renters," says Jakabovics.

Given such headwinds, you might think it difficult to find optimists on housing, but they are loud and strong.

"I believe there is this pent up demand," says the group's chief economist Lawrence Yun. "It is just a question of bringing buyers into the market and absorbing the inventory."

The NAR admits shifting demand has been a minor factor, but says fundamentals are improving, such that 2010 will bring the first increase in homes price in years.

"One thing that has been a drag will no longer be in place--that buyers expect prices to decline," says Yun. "Inventory will be brought down to a level consistent with home values growing modestly."

NAR expects house prices to rise 4 percent in 2010 with sales hitting 5.7 million units, slightly above the 2007 rate. About 15 percent of sales will be the result of the tax credit, which requires a contract by the end of April and closing by the end of June. (By contrast Fannie Mae (NYSE: fnm) is predicting sales of around 5 million and a price decline of just under 2-percent.)

The NAR forecasts may be difficult to hit given that home foreclosures and mortgage delinquencies are at or near record highs Richard Smith, CEO of the national real estate company Realogy, is not as optimistic about price appreciation, but he does see something of "a perfect scenario" for the market.

Smith, whose company's brands include Coldwell Banker and Century 21, says any change in employment, even sentiment, will help sales in general, while a snapback in new household creation will mean the traditional supply of new buyers.

Historically low interest rates-which may creep up a full percent over the next 14 months-will still be low enough to keep home affordability high.

"There have been times in the past three or four years you could be very cynical about housing," says Smith. "This is not one of them."